Russian IPO Market Horizons

Against the gloomy backdrop of the situation in the world's financial markets, which has been amplified by the sad news of more banks facing tough times, the Russian economy still gives cause for optimism to both domestic and international investors. Russia entered the Western markets' credit crunch in almost perfect shape: it's 6.5% debt-to-GDP ratio is enviable in the current environment. Russia's budget is balanced with a fiscal surplus running close to 6% GDP, and the current account surplus is above 7% GDP. The country also boasts the growing Stabilization Fund, designed to shield the economy from negative shocks in the commodities markets.

One should acknowledge that despite being a major global energy exporter in absolute terms, Russia is much more than just an energy empire. Its trade surplus from energy sales is less than 10% GDP.

Indeed, this fact becomes more evident when we analyse the rapid growth of various sectors of the Russian economy. In recent years, we have seen the rise of national champions in the sphere of natural resources competing successfully with their global peers. However, new stars have also appeared in other sectors that look towards capital markets as a source of further growth and as a means for a stronger presence in the international arena.

Last year investors were very enthusiastic about Russian companies playing a more and more active role in both domestic and international capital markets, raising funds to support business expansion in the fast-growing economy. 2007 saw 32 public placements of Russian companies in all major sectors of the economy, raising total funds of more than $31 billion.

A landmark $8 billion IPO of VTB Bank showed the way for Russian financial institutions, and was followed by a successful IPO of Bank Saint-Petersburg. Meanwhile, the IPOs of PIK, AFI Development, and LSR set the path for the real estate sector. The power industry (where electricity sector reform produced a number of new players -- OGKs and TGKs -- spun-off from a state monopoly to undergo a complete change of ownership) was among the country's most active in terms of capital market transactions. Russia's booming retail sector continued to attract investors and the deals conducted by Dixy and M-Video were representative of this trend.

This shows the enormous potential and strength of the Russian economy on the whole, and the fast pace of growth of the developing equity capital markets.

Today, the overall weakness of global financial markets undermines Russian companies' plans to raise equity capital. They are not prepared to offer part of their business to investors at all costs. And unfortunately, the market trend is not changing for the better yet.

In 2008, the number of postponed IPOs has increased all over the world, including Europe, America and Asia, with the US heading the league table followed by Asian and European issuers, according to a recent Thomson Reuters survey. This echoes the situation in Russia where in 2008, only one Russian company managed to complete an IPO -- Globaltrans -- whereas a year ago 20 deals were closed during the same period. The events in the world financial markets could not but affect sentiment in Russia. Just recently, several Russian companies announced that they were postponing their IPOs until 2009-2012.

In the distressed markets companies are looking out for better options. Follow on public offerings and private placements have become more popular instruments under the recent circumstances. In 2008, a number of Russian companies, including Fesco, Razgulaj Group, Magnit, X5, and Open Investments, managed to close successful deals.

This indicates that the Russian investment case is still appealing to investors looking for excellent stories and a strong management capable of fulfilling business plans and achieving targets.

The above tendencies support our view that the process of incorporating Russian business and companies into the global market may slow down as a result of the global liquidity crisis, but cannot be stopped. The growth of the Russian economy, coupled with domestic companies' ambitious plans to transform into multinational corporations, will be a powerful incentive for further development and new capital market transactions.

Russia's investment appeal may still seem strong if the country's economy can demonstrate healthy fundamentals and if the CBR and the Russian government continue in their efforts towards stabilizing the situation and minimizing the effect of distressed global markets.

Despite all the negative news and global investment banks' more conservative approach in the current unstable conditions, their Russian subsidiaries are continuing to do business in Russia, leading local investment banks are rapidly expanding, and new strong players are emerging. This shows that compared with other countries and regions Russia is still considered to be a very attractive market and that the investment business is among the first expected to recover and gain speed once global financial markets come out of the turbulence zone.